September 2011

09/29/2011

Living with Alzheimer’s disease is very difficult for the individuals affected and their loved ones. But by dedicating some time early on in the diagnosis and fighting for the cause during World Alzheimer’s Month and beyond, a family can know they have done everything to support their loved one to live a full life and protect their legacy.

You may not have known but September is World Alzheimer’s Month. As the month comes to a close, it’s important not to forget about Alzheimer’s. Medical research and advocacy are vital causes to uphold. Nevertheless, it is a disease that you and your loved ones might have to face directly, if you have not already. The reality of Alzheimer’s or dementia striking close to home, then some understanding and prior planning can help you in terms of the extensive economic toll and the unique legal ramifications.

According to a recent Forbes article, Alzheimer’s is as widespread as it is demanding. Consider this: Another American citizen will develop Alzheimer’s every 69 seconds. The symptoms are oftentimes subtle, at least initially. Some estimate that more than 13 million Americans will have the disease by 2050 and run up as much as $1 trillion in costs. Because of the progressive nature of the disease, most of the costs and problems won’t develop until later on. Nevertheless, significant planning must take place at the time of diagnosis, if not anticipated beforehand.

So, what is the scope of this “significant planning”? First, you will need to secure medical care, both for now and for the future. That means fundamental financial planning need to be addressed, to include securing government benefits like Medicare and Social Security Disability Insurance. Second, because of Alzheimer’s progressive cognitive degeneration, estate planning must occur early in the process to secure and protect family assets.

Fundamentally, it’s important to understand that Alzheimer’s is not the same as other diseases. Through it all, competent counsel will be necessary to properly assess the needs and possibilities, as well as to ensure that everything is in place when needed most.

09/27/2011

Sometimes you travel because you want to, sometimes because you need to. Whatever the reason, planning a trip can be logistical nightmare for caregivers.

Being responsible for an elderly loved one can mean adopting a rather rigid schedule and lifestyle, especially if you are the primary caregiver. How, then, do you travel? It can be a logistical nightmare, whether the travel is elective or necessary. Regardless, understanding some of the challenges and workarounds in advance can make the travel more manageable. The New Old Age blog at The New York Times recently offered some food for thought on this important subject.

09/26/2011

Being asked by friends or family to be executor of an estate is a big honor, but the warm feelings can vanish once the job starts.

Choosing an executor can be a difficult task, and in no small part this is because it means finding someone you trust to do as you would do. Oftentimes it is gesture of trust and respect made to a friend or family member. Neither the estate planner nor the would-be executor ought to forget, however, that serving as executor can be a fairly difficult role to play. The Wall street Journal recently offered some practical insights and advice on the topic, noting that to be named executor is both “an honor… and a pain.”

Simply put, the executor administers a decedent’s Last Will and Testament through probate, navigating the many twists and turns of that court process. Administration involves accounting for assets, paying bills, and distributing assets in accordance with the terms of the Last Will.

The process typically takes time, too. It can mean up to several years for larger estates, and during that time the executor must keep up with the associated laws, tax code changes, and financial investments, or else intelligently delegate such responsibilities to professionals. It means that a “non-professional” can do the job, but perhaps not an amateur; you have to know your abilities and have confidence.

The biggest problem an executor will face, by and large, is a shifting relationship with the family. Money can make people antsy or even belligerent, even if the terms are clear in the Last Will, and that’s something an executor might have to bear. This is especially true of family members turned executors who may face soured relationships at family functions. Accordingly, that can make for some awkward moments around the Thanksgiving table.

Practically speaking, to serve as an executor you must anticipate the challenges ahead of time, prepare for them, and remain organized. Indeed, organization is essential throughout the probate process, to include separating yourself into the two roles: executor and family member/friend.

While planning your estate and settling on an executor, consider alerting your would-be executor your decision ahead of time. Doing so will allow them to prepare for the role, and perhaps even get directions from you personally. For more advice and anecdotes you can read the original article here, but to get a better idea of the challenges it is best to consult with your estate planning attorney for advice and counsel.

09/23/2011

If you’re an executor for someone who died in 2010, mark your calendar for January 17, 2012. That’s the new date by which you must now file a key federal tax form.

If your last name is “Steinbrenner,” or you also are the heir to the estate of a decedent who passed in 2010, then you likely know that your assets stand at a crossroads and that the estate executor has a huge choice: to file for the estate tax or not to file? That, is the question.

Formerly, the deadline was November 15, 2011, only a couple weeks out. Good news: Now, the deadline has been extended out to January 17, 2012.

So, why is there even a choice to file an estate tax return anyway and why might it be a difficult choice? It exists, as you may know, because last December’s budget compromise created an estate tax for the year in which there wasn’t any estate tax. The move was to offer a “retroactive” estate tax to cover up the hole Congress had previously left open by allowing the 2010 tax to lapse.

Of course, practically speaking anyway, it still doesn’t sound like a choice was created because, well, who would choose the estate tax? Indeed, there is a reason to choose the estate tax, but it depends entirely on the nature of the assets in the estate because of the “carryover basis” versus the “stepped-up basis” dilemma.

If you choose not to pay the estate tax, then it catches up to you in the form of capital gains taxes upon the eventual sale of those assets. This is because the IRS will use the “carryover basis” or the original cost of the assets when determining capital gains. Assets that have significantly appreciated, or assets for which you cannot prove an original value, can become liabilities if you also plan to sell them. On the other hand, if you chose to pay the tax (35% on assets in excess of $5 million) then the IRS will use the “stepped-up basis” or current market value when determining the capital gains tax owed.

Bottom line: As with any estate tax planning, make sure you consult with competent legal counsel, especially well before the clock runs out on January 17, 2012. In such instances, it may be prudent to file the estate tax return since you won’t pay taxes, but the rest involve a difficult calculation.

09/20/2011

As the amount of money stashed in 401(k)s and individual retirement accounts has grown, more and more families are finding themselves locked in battles over who has rights to the assets.

Even with the many concerns over retirement accounts in America, it’s undeniable - IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to include when it comes to their role in your estate planning. Indeed, amongst households with at least $100,000 to invest, 60% of the household’s assets are in an IRA or 401(k).

So, how ought retirement accounts factor into your estate planning. Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, different laws apply to 401(k)s and IRAs.

The inheritance of retirement accounts is a lively topic and none other than The Wall Street Journal has recently offered a piece on the issue. While I commend the full article to your reading file, let’s review a few of the highlights here.

With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until you are actually married. Plan accordingly.

What if you have children from a former marriage and you want to include them as beneficiaries along with your new spouse? Consider “rolling” your 401(k) into an IRA and making the beneficiary designations per your wishes, even if your children are beneficiaries under your will and trust.

Teaching point: The beneficiary designations on file with the retirement plan administrator trump any contrary arrangements in your will and trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator.

IRAs are governed by state law and that, by and large, makes them more pliable. Without the inflexibility of the ERISA laws, when it comes to your IRA it’s all about the named beneficiary (unless there is a state law to the contrary). One thing remains consistent, however. The beneficiary on file with the plan administrator takes precedence over any provisions under your will and trust. Exceptions: Some state laws rule out the complete disinheritance of a spouse and some have laws automatically disinherit an ex-spouse as beneficiary, unless you’ve completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary.

Bottom line: Retirement accounts, whether 401(k)s or IRAs, are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney admitted in your state of residence, as state property laws may need to be evaluated, too.

09/18/2011

One of the most common estate planning mistakes that people make is joint ownership.

Estate planning can be daunting. Once you get past the fact that your very mortality (and morbidity) is the triggering event, estate planning means taking stock of all you own and, what is often more important, how you own it. Yes, there are many degrees of ownership and each can make for some difficult wrinkles.

One common phenomenon is joint ownership between generations. Not only is it common, but it can make for some unintended problems. Forbes recently ran a piece on some of these problems and the five reasons to avoid such ownership form. Let’s review some of the high points, but I would commend the full article to your reading file.

Joint ownership oftentimes is an attempt to simplify things, or at least that is why people use it as a means of holding title. Perhaps they want to simplify practical day-to-day financial management. Aging parents needing such help may add an adult child’s name to a bank account or investment, either for direct aid or for just assisting in managing the accounts or assets. Likewise, it could be done as an attempt to avoid probate. Adding the adult child’s name to the account, investment, or real estate as a form of will-substitute (a so-called “poor man’s will”). Of course, these are only simple solutions, and may actually work, when things go off without a hitch.

One problem to remember is joint-ownership is a two-way street. That means that adult child joint owner has equal ownership rights to the assets and so do any of that adult child’s financial predators. The adult child may have their own creditors, may be facing an acrimonious divorce, or may be sued for damages in civil court. In addition, while no parent would anticipate it, the adult child may use the jointly owned bank account for a “quick loan” when they are running a little short of cash. Any of these unintended consequences can not only jeopardize the financial independence of an aging parent, but can cause hard feeling among other adult children who may (or may not) be joint owners with their parent.

Another problem, especially from an estate planning perspective, is that joint ownership as a stop-gap or a will-substitute is not really estate planning and may run afoul of the parent’s actual estate distribution wishes. For example, the adult child who has joint ownership doesn’t have to share such assets upon the parent’s death. As you can imagine, it is very easy for such cases to spill over into family squabbles and even prolonged court-cases.

Sometimes joint ownership seems like a good idea and a quick fix to avoid probate. And, sometimes it is. Before you use joint ownership as a form of titling your assets, however, consider the drawbacks.

In the end, an estate planning attorney can help you determine whether joint ownership is appropriate under your unique circumstances. Remember: Look before you leap. The protection of your assets and family relationships are at stake.

09/16/2011

Deciding how to leave your assets to your kids is tricky enough. If your adult child has a chronic disability, the task is much more complicated.

Estate planning is never easy, if only because it means thinking about protecting your loved ones when you’re no longer around. It’s bad enough making plans to protect self-sufficient heirs who take care of themselves and an inheritance. However, it can be a real challenge when planning for heirs with special needs for a variety of personal and legal reasons. Unfortunately, as The Wall Street Journal Online recently pointed out, with the economy and politics as they are, there are new concerns to bear in mind as you plan.

Both the State and federal budgets are strapped for cash and the burden is falling on Medicare and Medicaid. It’s up to the Congressional Special Committee to consider the future of Medicare now, but many Medicaid programs already are feeling the squeeze with tighter income restrictions for benefits and services.

Of course, much of the disabled population (12% of the overall population) relies on state and federal services for those services that they couldn’t afford in the private market. To plan for an heir with special needs, then, means planning to provide for them without risking their main sources of care. Now, more than ever, that means a “special needs trust,” tailored to provide the inheritance as a safety net without endangering the continuation of benefits.

The other major issue, and a related one, is housing. Many Americans with special needs live in group housing programs. These programs are, in turn, subsidized by government agencies, but are increasingly unable to meet demand and are cash-strapped. For one, the same political/economic pressure is keeping those agencies from expanding.

At the same time, there simply are more prospective residents due to lengthening life expectancies. The US would have had to expand its residential-services capacity by 28% to meet the demand as of two years ago. Clearly, housing has been an issue and it will only get worse.

Amidst all of this uncertainty, you still need to plan where your loved one will live. This might mean another form of trust. For example, a “Qualified Personal Residence Trust” (QPRT) would provide that you live in your home until your death, but that your family member with special needs would live there (without disqualifying ownership). Great care would need to be given in the preparation of such an arrangement. Also, it may be possible to provide a home to shelter several persons with special needs. For example, say several families pool resources, or even to leave a home to a non-profit that can convert the home into a new group home. The options are limited by your creativity.

Ultimately, the best plan will depend on your own unique family circumstances, as well as the current state and federal laws governing benefits and services. Unfortunately, according to a recent study by Arc, an advocacy group, only one-third of affected actually has plans to control what happens when the caregiver grows old and after they are gone.

Bottom line: Remember to engage qualified legal counsel to help you navigate the regulatory minefields.

09/15/2011

There are many options to protect your children from themselves but the options are the epitome of tough love. Still, they could help your child in the end.

While planning for your estate addresses many concerns, likely providing your loved ones is at the top of the list. But what if you can fully trust your loved ones to use your gifts wisely and to take care of themselves responsibly? One common alternative is to cut those problem cases out of the will through disinheritance. Nevertheless, as a recent New York Times article points out, those problem cases are all the more reason to make proper estate plans to protect your legacy and to use the inheritance to promote positive change.

Problem cases for inheritances aren’t all “problem” children. You know, the gamblers, the drug addicts, and the habitually irresponsible within our families. Oftentimes, the risks to an inheritance do not necessarily originate with the problem child, rather the problems find the child… and their inheritance. Classic examples of inheritance predators include divorces, lawsuits and bankruptcies.

Indeed, much of the time the concern is just over the possibility of future problems, ones you can’t foresee while planning your estate today, especially when you’re planning with young children in mind. However, the form of the inheritance can help curb present problems and work to avoid future ones by instilling character.

How can you do it? The most powerful tool is the trust for a variety of reasons. At the most basic level, the trust allows limits. Regardless whether money is the cause of the problems, it’s certainly not going to help. A trust can limit the access your loved one has to the money, while still ensuring it is available when they truly need it.

Within the concept of a trust, there are many varieties and options to address nearly every concern. For example, there is the “incentive trust.” This trust still restricts funds, but will make funds available if the beneficiary meets certain stated objectives. A classic example may be remaining drug-free for a certain number of years. On the other hand, it can be a character-building trigger like admission to a certain college or graduation from one. In short; the triggers can be just about anything. Experience has demonstrated, however, that this approach is most effective when you are upfront now about rules of the road regarding the correlation between future conduct and availability of the funds. Take the opportunity to pass along your positive values, rather than just set up a future gotcha program for a loved one to “game” after you are gone.

For those planners who take a uniquely long view, there also is the option of the “dynasty trust.” It has all of the benefits of a trust, but extends those benefits across as many generations as possible, for as long as the funds last (according to current law), and, quite literally, works to form dynastic wealth. That means that using one properly can mean protecting the family assets from problem inheritors for several generations.

09/14/2011

Medicare Advantage plans can save older Americans money, but difficulty choosing among the many available plans often prevents them from realizing substantial cost-savings.

Did you know Medicare’s annual election period is just around the corner, October 15 through December 7, to be precise? Now is the time to evaluate your options. Should you stick with your current plan, or is it time to make a change? Would you be better off using Medicare classic or is a Medicare Advantage Plan the ticket?

This is not planning that you should take lightly, especially when it comes to Medicare Advantage plans. According to a recent article on MarketWatch many seniors simply end up paying too much. Why? Because they either didn’t take the time to evaluate their options, or they didn’t understand the consequences of their decision.

About 1 in 4 of all Medicare recipients is signed up through a Medicare Advantage plan – about 11.7 million Americans – and for good reason. Under the right circumstances a Medicare Advantage plan can be much cheaper than pairing Medicare classic with Medigap and prescription drug plans. You just have to choose wisely.

Plans vary in many ways, some great and some small, and, without realizing it, you could choose a plan that makes your prescriptions cost several times what another plan would offer. The MarketWatch article’s most telling example is that “people in one Georgia zip code who take 70 mg tablets of osteoporosis drug Fosamax once daily may have annual expenses ranging from $2,661 to $9,032 — depending on which Medicare Advantage plan they pick.”

I can understand and appreciate that it’s easy to get confused. You can easily suffer option overload, especially for the 25% of the nation that has 30 or more plan options. To narrow things down, keep a few things in mind. First, how important is your doctor to you? Advantage plans don’t let you choose your doctor. Why? They work as managed-care policies, either health maintenance organizations (HMOs) or preferred provider organizations (PPOs), and specify the networks. So, if you like your own doctor, then you might consider only those plans where your doctor is within the plan network. Realize, however, that keeping your own doctor may come at a price. When it comes to cost, the second and most important detail after choice of doctor, you want to keep updated and run the numbers every year. Plans can change every year by tweaking co-payments here or altering premiums there, not to mention the fact that you might find yourself taking new prescriptions year to year. You need to examine all the changes and actual prices for your prescriptions to get a true picture of your true costs. By the way, when comparing costs, the Medicare website can be helpful with its plan finder tool. Atlernatively, you also can consult experts like those at the Medicare Rights Center or a local organization.

09/13/2011

You can reverse a 2010 Roth conversion. Then it's like the conversion never happened, which means the inflated conversion tax bill disappears.

Are you still reeling? August was a tumultuous money month (to say the least), but at least we can breathe a sigh of relief that it’s over. Hopefully the upcoming months will bode better.

The S+P downgrade and the following correction, as well as several other market drops, hit and hurt a lot of people. Of course, if your Roth IRA was hit then you’ve also got a bit more work to do to protect yourself. As a recent SmartMoney article details, you can still un-do a Roth IRA rollover from 2010, at least until October 17, that is.

Many people rolled over into Roth accounts in 2010, as recent rules allowed Americans of all incomes to do so. Why did they do so? Well, the Roth IRA can be a powerful income source in retirement or even a tool for estate planning purposes. This is because you pay the tax up front and no tax at the time of withdrawal. That is why the Roth IRA is so special.

Problem 1: With the recent market volatility, perhaps you have lost your shirt (and your socks) on your investment accounts, including your recently converted Roth IRA. Problem 2: Now you are facing a larger tax bill due to your Roth IRA conversion and you have even fewer spare dollars to foot the bill.

Good news: Before it’s too late, “re-characterize” your Roth IRA accounts and, by so doing, at least save yourself from the tax burden and live to fight another day. Read the SmartMoney article and share it with your similarly situated family members and friends.